- Settlement Agreement resolves historical litigation
- NPI royalty on 777 mine converted to NSR on current ground and
a new NSR on expanded ground
- War Baby to be explored by Hudbay via option earn-in and future
NSR to Callinan
VANCOUVER, Nov. 26,
2014 /CNW/ - Callinan Royalties Corporation ("Callinan", or
the "Company") (TSXV: CAA) is pleased to announce that it has
entered into a definitive agreement (the "Settlement Agreement")
with Hudson Bay Mining and Smelting Co. Limited, a wholly owned
subsidiary of HudBay Minerals Inc. (together "Hudbay"). This
Settlement Agreement marks an end to protracted litigation which
Callinan initiated in early 2007, and commencement of a new
consensual relationship with Hudbay.
The Settlement Agreement was structured to achieve the following
objectives:
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1)
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Evolution of a 1988 6
2/3% Net Profits Interest royalty ("NPI") to a more attractive 4%
Net Smelter Return royalty ("NSR") which reduces the areas of
possible disagreement between the two parties over permitted
deductions, without significantly impacting estimated yearly
royalty income;
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2)
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Establishment of a
new 3% NSR on 31.10 square kilometres of surrounding Hudbay
exploration ground, ("expanded royalty ground") which broadens
Callinan's area of exposure to prospective exploration that Hudbay
may pursue in the future;
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3)
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Allows for Hudbay to
explore Callinan's War Baby claim1 (also known as "777
Deeps") by way of option agreement, which requires access from the
existing 777 mine and significant funding to properly
explore;
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4)
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Recognition of the
need to settle ongoing litigation and for a co-operative and
enduring working relationship with Hudbay, benefiting the Flin Flon
community.
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Brian Irwin,
Callinan's Chairman, commented, "We are pleased to resolve this
ongoing litigation in a way that compensates us and provides a
mechanism for transparency in our future royalty income. This
litigation might otherwise have continued for an unknown period,
drawing upon Callinan's financial and legal resources. If
fully exercised, the settlement will result in aggregate payments
by Hudbay of up to $19 million,
including expenditures on the War Baby Claim of $7 million. Over the years, we have
received shareholder and other stakeholder encouragement to
modernize our 1988 NPI royalty to reflect the current 777
production and zinc refinery operations controlled by Hudbay and to
reduce our exposure to potentially increasing sustaining capital
costs and operating costs as the mine gets deeper." Mr. Irwin
added, "The War Baby property, which is deeply embedded in our
history, will see significant exploration over the next few years,
an objective which would have been outside our core business plan
and difficult to execute given the requirements for access.
Finally, the payments described above are in addition to the
$6.3 million adjustment received in
2011 from Hudbay."
The value of the settlement, in cash payable to
Callinan for general corporate purposes, includes Hudbay committed
exploration expenditures to earn into War Baby and the additional
advance royalty payment if the War Baby option is exercised, and
ranges from a minimum of $6.5 million
to a maximum of $19 million.
The minimum is received regardless of whether or not Hudbay elects
to terminate its work after certain specific milestones and return
the War Baby property to Callinan; whereas the maximum assumes
Hudbay elects to earn a 100% interest in War Baby. The
following tables illustrate the minimum and contingency payments
payable upon certain milestones and the NSR entitlements:
Cash
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Immediate
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By end of Year
2
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By end of Year 4,
upon option
exercise
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$3.5 million
cash
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$3 million War
Baby expenditures
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$4 million
milestone payments
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$1.5 million to
keep option or access
ground
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$4 million
expenditures
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$3million advance
royalty payment
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$3.5
million
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+
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$4.5
million
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+
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$11
million
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Royalty
Immediate
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Upon option
exercise
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4% NSR on
777
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3% NSR on War
Baby
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3% NSR on
Expanded Royalty
Grounds
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The elements in the table above comprise the minimum and maximum
payments assuming exercise of the War Baby option. In
addition, Hudbay has the right to pay a further $2 million at its election to reduce the 3% NSR
on the expanded royalty lands to 2%. Moreover, if Hudbay
terminates the War Baby option, but chooses to use War Baby ground
to access its 777 mine operations, Hudbay will pay to Callinan an
access fee of $125,000 per
quarter.
These changes become effective at different dates in order to
accommodate the lag times associated with the current royalty
payments and adjustments. The release of Hudbay from any
further litigation action, start of the exploration expenditure
period for Hudbay's option to earn up to 100% of War Baby and
payment of the initial $3.5 million
from Hudbay to Callinan are all effective as of the agreement date.
Finally, the conversion of the existing NPI royalty to a new 4% NSR
royalty and establishment of the new 3% NSR on the expanded land
package take effect January 1,
2015.
The following sections summarize the main components of the
Settlement Agreement and its implications.
The Settlement Agreement
Conversion of Existing NPI Royalty to 4% NSR
Under the Settlement Agreement, Callinan and
Hudbay have agreed to terminate the NPI agreement effective as of
December 31, 2014 and have entered
into a new 4% NSR royalty agreement over the 777 mine claims
effective January 1, 2015. They also
agreed to maintain the production royalty of 27.56 cents per metric tonne payable to Callinan
by Hudbay on all ore removed and processed from the 777 mine.
Raymond James Limited has provided an opinion to Callinan that the
conversion is fair from a financial point of view.
New 3% NSR on 777 Expanded Royalty
Ground
Hudbay has granted a 3% NSR royalty over
additional mineral claims covering 31.10 square kilometres of
adjacent royalty lands located generally to the south and west of
the 777 mine, including the former producing Flin Flon mine. The new royalty lands are
underlain by prospective geology. This action significantly expands
the total royalty area of Callinan, but equally importantly, it
mitigates potential areas of future dispute over logistics and
access to the War Baby claim, given that the intersected
mineralization is at depths of approximately 200 metres below and
east of 777 known reserves. Hudbay has the right to
repurchase 1/3 of the 3% NSR for $2
million.
The production royalty of 27.56 cents per metric tonne does not apply to
the War Baby claim or to this additional royalty ground.
War Baby Earn-in Agreement
Hudbay has entered into an earn-in agreement (the
"Option Agreement") on the War Baby property. Under the Option
Agreement, Hudbay may earn a 100% interest over 4 years in War Baby
by completing the following milestones:
- Incurring $7 million in
exploration and development expenditures of which $3 million is a firm commitment, staged as
described in the above table.
- Providing $7 million in cash
payments, staged as described in the above table.
- If, after spending the initial expenditures and providing cash
payments to Callinan, Hudbay elects to complete the Option
Agreement, then Callinan will also be granted a 3% NSR royalty on
War Baby including an advance royalty payment of $3 million.
- If Hudbay fails to complete the Option Agreement by the fourth
anniversary, the property will be returned to Callinan in good
standing and with no interest retained by Hudbay.
- If, during the option period, Hudbay uses the War Baby ground
to access the 777 mine operations, Hudbay will pay Callinan an
access fee of $1,500,000 (as
referenced in the table above). If Hudbay terminates the
option agreement and subsequently uses the War Baby ground to
access the 777 mine operations, Hudbay will pay an access fee of
$125,000 per quarter for each quarter
when access is used.
Conference Call
Callinan will hold a conference call on
November 26, 2014 at 8:00 AM PST/ 11:00 AM
EST to provide additional details on the Settlement
Agreement and to make senior management available to interested
shareholders and analysts. Interested investors are invited to
participate as follows:
Via Conference Call: Toll-Free: 1-888-390-0546; International:
+1 416-764-8688 (No passcode required.)
Via Webcast:
http://www.newswire.ca/en/webcast/detail/1452473/1615483
On Behalf of the Board of Directors,
Brian Irwin
Brian Irwin, Chairman
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1
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Callinan's 100%
ownership of War Baby is subject to (i) a 2.5% Net Smelter Royalty
payable to W. Bruce Dunlop, which is subject to a right to
repurchase up to 1.5% of the NSR for payment to Bruce Dunlop of
$500,000 for each 0.5% acquired, and (ii) the Bison Back-in Right,
which allows Bison Gold Resources a 10% back-in right subject to
certain conditions.
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About Callinan Royalties
Callinan Royalties Corporation is one of the
oldest public listings in Canada,
and one of the first contributors to development of the
Flin Flon, Manitoba copper-zinc
district. Callinan holds a 6⅔% net profits interest royalty
and a production royalty of $0.275
per metric tonne of ore milled on lands that include the producing
777 mine and 777 North mine operated by Hudbay Minerals
Inc.
The Company invests its royalty income to provide
alternative financing options to mineral exploration and
development companies with attractive projects and excellent
management.
Callinan is a dividend-paying Tier 1 company
listed on the TSX Venture Exchange under the symbol CAA. The
Company has a strong financial position with no debt, recurring
annual cash flow from the 777 royalties and approximately 49.2
million shares outstanding.
Cautionary Statement on Forward-Looking
Information
Neither the TSX Venture Exchange nor its
Regulation Services Provider (as that term is defined in the
policies of the TSX Venture Exchange) accepts responsibility for
the adequacy or accuracy of this release.
Certain of the information presented in this
News Release may constitute "forward-looking statements" or
"forward-looking information" within the meaning of Canadian
securities legislation (together referred to as "forward-looking
statements"). The forward-looking statements are subject to risks,
uncertainties and other factors that may cause actual results to be
materially different from those expressed or implied by such
forward-looking statements, including any delays in the receipt of
consents or approvals. Although Callinan Royalties has attempted to
identify important factors that could cause actual actions, events
or results to differ materially from those described in
forward-looking statements, there may be other factors that cause
actions, events or results not to be as anticipated, estimated or
intended. There can be no assurance that such statements will prove
to be accurate as actual results and future events could differ
materially from those anticipated in such statements. Accordingly,
readers should not place undue reliance on forward-looking
statements contained in this News Release and in any document
referred to in this News Release. Forward-looking statements are
made based on management's beliefs, estimates and opinions on the
date the statements are made and Callinan Royalties undertakes no
obligation to update forward-looking statements if these beliefs,
estimates and opinions or other circumstances should change, except
as required by applicable law.
SOURCE Callinan Royalties Corporation